The importance of a quality trust deed
By Riley Jones
When setting up a discretionary trust it's important to have the right structure, but it is equally important to have the right trust deed. The trust deed outlines the responsibilities and powers of the trustee, who can benefit, the rights of the beneficiaries, and determines the way that income and capital can be distributed. It’s an important legal document setting out the rules of the trust and is vital to the ongoing administration of the trust.
Following is a list of some of the other features of our discretionary trust deed (the most popular form of trust product ordered by members).
Features of NTAA Corporate's
Discretionary Trust Deed
The general beneficiary clause is very wide, basically including almost anyone related by blood or marriage to the Primary Beneficiaries, as well as trusts and companies in which they may have an interest – refer subclause 1.18.
- If no determination is made to distribute the income of the trust for a particular income year, the income will be held on trust for equal distribution amongst the Primary Beneficiaries aged 18 or more (unless any of them have died, in which case their share will be distributed equally to their children aged 18 or more) – refer subclause 5.4.
- When the trust is wound up (which will effectively be 80 years after the trust commences, unless the trustee decides to wind it up earlier or the trust is in South Australia – refer subclause 1.31) the trustee can distribute the assets of the trust fund as it thinks fit and, if it does not make a determination, they will be distributed to the Primary Beneficiaries (unless any of them have died, in which case their share will be distributed equally to their children, or, if none of them are alive, equally to the general beneficiaries) – refer subclause 6.5.
- The trustee’s powers have been drafted as broadly as possible, also allowing the trustee to act as if it is the sole and beneficial owner of the assets of the trust fund, and should include most situations that a trustee will encounter (although note that banks are notorious for requiring very specific powers to be inserted, and may still insist on this despite the trustee having very broad power to act under the deed) – refer clause 13.
- The trust deed allows income derived from the investment of property received from a deceased estate (and similar property) to be distributed to minor beneficiaries such that they retain their preferential tax status (i.e. for the income to be taxed at adult rates) – refer clause 11. There is a dispute resolving mechanism when there is more than one trustee and they can’t reach an agreement – refer subclause 15.3.
- If there is more than one appointor, they must make decisions unanimously (unless the deed has been varied to provide otherwise), and there is a dispute resolving mechanism if they can’t reach an agreement – refer subclauses 19.1 & 19.2.
- If the trustee received a testamentary gift (i.e., under the will of a deceased person) and there may be a problem with a technical legal rule known as “the rule against the delegation of testamentary power” (or any other such legal rule or law) then that gift is considered to be held on trust for the beneficiaries existing at the time the trustee receives the gift. New beneficiaries can be added but if any such technical rules apply, they cannot share in that gift – refer clause 12. Note that this rule is still contentious in Australia, but the clause has been inserted to remove doubt.
- It is possible for the trustee to resettle this trust (i.e., the trustee is not prohibited from doing so and may, for example, add new beneficiaries) but utmost care should be taken when resettling the trust (or in doing anything that may resettle the trust), due to the adverse tax consequences that may result. Resettling that trust can basically result in a totally new trust arising, and the assets of the old trust being deemed to be sold to the new trust, potentially triggering CGT, GST and stamp duty issues. Expert advice should be obtained before doing anything that may resettle the trust.
The deed should be read in full to fully ascertain the relationship between the trustee(s) and the beneficiaries.
Don’t forget that we have different versions of our discretionary trust deed that can be used in other situations, including our Pedigree Discretionary Trust deed (which excludes spouses of beneficiaries from being capital beneficiaries of the trust or from being able to become trustees or appointors), our Foreign Exclusion Discretionary Trust deeds(which broadly exclude certain ‘foreigners’ from being beneficiaries of trusts in certain States where there may be a stamp duty and/or land tax surcharge), and our Child Maintenance Trust deed (which is drafted to take advantage of the tax benefits of setting up such a trust after a relationship breakdown, and is broadly a fully discretionary trust deed in terms of distributing income, although the trust assets will need to go to the children for whom the trust has been set up).
In light of recent ATO audit activity, our legal team is currently working on a Services Agreement to assist with documenting a service entity arrangement between a principal practising entity and a service trust. This isn't available just yet but we will be communicating with members once it's ready to go! They have also ensured that our trust deeds provide all newly established trusts with complete powers to act as a service entity (note that older trust deeds still provided these powers).